Alkermes Plc (ALKS) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes conference call to discuss the Company's second-quarter financial results for fiscal 2008. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Alkermes' request.

Now I would like to introduce your host for today's call, Ms. Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Thanks very much. Good afternoon and welcome to the Alkermes conference call to discuss our financial results for the second quarter of fiscal 2008, which ended on September 30, 2007. With me this afternoon are our CEO, David Broecker; our CFO, Jim Frates; and our Chairman, Richard Pops.

Before we begin, let me remind you that during today's call we will make forward-looking statements relating to among other things our expectations concerning the commercialization of RISPERDAL CONSTA and VIVITROL, our financial and business performance, our expectations concerning the continued development of our product candidates. Listeners are cautioned that these statements are neither promises nor guarantees but are subject to risks and uncertainties that could cause our actual results to differ materially from the results contemplated by these forward-looking statements.

You can find a list and a detailed description of these risks in our annual report on Form 10-K filed on June 14, 2007 and other periodic reports filed with the SEC under the Securities Exchange Act of 1934 as amended. We undertake no obligation to update or revise the information provided in this call.

This afternoon, Jim will discuss our second-quarter financial results and David Broecker will provide an update on our business. We will then open up the call for Q&A.

Now I would like to turn over the call to Jim to review the financial results.

Thanks, Rebecca. Good afternoon, everyone. We're very pleased to have our earnings call the day after such an important announcement on once weekly exenatide. From a financial and business perspective, this news is very exciting for us. This positive data moves us a major step closer to having another blockbuster product in our portfolio as we seek to deliver meaningful earnings growth for our shareholders.

Turning from the future to the present, we are also very pleased to report another profitable quarter, our fifth in a row, driven mainly by manufacturing and royalty revenues from RISPERDAL CONSTA. And market sales by Johnson & Johnson continue to grow. Worldwide sales are $293.6 million for our second fiscal quarter and have now exceeded $830 million for the first three quarters of calendar 2007.

From a sales perspective, the overall RISPERDAL franchise is now J&J's largest within its pharmaceutical business and with RISPERDAL CONSTA on a run rate of almost $1.2 billion annually, we and Johnson & Johnson expect the product to grow well into the future.

With respect to VIVITROL, quarterly growth sales were $4.7 million, an increase of 16% from the previous quarter. From a clinical perspective, VIVITROL is an important medication and we and Cephalon believe that over time we can grow the product into a meaningful contributor to our bottom line. The key for us, as we have discussed all year, is to find the right balance between investing in the product while remaining financially prudent.

David will discuss the commercial strategy in more detail, but from a financial perspective, we are focused on our spending. Over the last two months, we have streamlined our sales organization to a group of 70 people. This allows us to target a breakeven business by the end of calendar 2008 without curtailing continued investment in additional clinical studies and market development activities.

So from a financial perspective, our business is strong. Cash flow has been positive this fiscal year and our balance sheet includes approximately $363 million in cash and total investments.

In addition, we have another financial asset I should highlight for you which is not currently reflected on our balance sheet. As many of you are aware, we own 5 million shares in Reliant Pharmaceuticals. Reliant recently filed with the SEC for initial public offering with a stock price range of $25 to $27 per share. The filing identifies Alkermes as a seller of one million shares in the event the offering is successful. As we have said, our intent is to monetize our stake as efficiently as possible after the lock up period expires.

Now I will move onto the financial highlights from our second fiscal quarter ended September 30, 2007. The press release issued today contains additional details.

Our net income for the second quarter was $7.7 million or $0.08 per basic and $0.07 per diluted share, including share-based compensation expense of $4.5 million. This compares to a net income of $3.7 million or $0.04 per basic and diluted share for the same period in 2006, which included $6.4 million of share-based compensation expense.

On a pro forma basis excluding share-based compensation expense and the increase in the fair value of certain public company warrants we held, net income for the second quarter was $11 million or $0.11 per basic and diluted share. This compares to a net income of $10.8 million or $0.11 per basic and $0.10 per diluted share for the same period last year.

To review revenues, total revenues for the second quarter of fiscal 2008 were $58.6 million compared to $61.2 million for the same period last year. The reduction in revenues compared to last year was driven mainly by lower VIVITROL related revenues. Total revenues included $22.9 million in manufacturing revenue related to RISPERDAL CONSTA; $1.2 million in manufacturing revenue related to VIVITROL; $7.3 million in royalty revenue related to RISPERDAL CONSTA; $21.2 million in R&D revenue; and $5.9 million in net collaborative profit.

For the same period last year, total revenues included $20.9 million in manufacturing revenue for RISPERDAL CONSTA; $5.2 million in manufacturing revenue for VIVITROL; $5.8 million in CONSTA royalty revenue; $17.6 million in R&D revenue; and $11.6 million in net collaborative profit. Our expenses were in line with our expectations and are outlined in detail in our press release issued today.

Finally as we are halfway through the fiscal year, I want to comment briefly on our financial expectations for the full fiscal 2008 year. While our financial performance for the first two quarters was strong, we are maintaining our full year financial expectations at this time for two reasons. First, we expect lower manufacturing revenues related to RISPERDAL CONSTA in the third fiscal quarter as J&J is working to reduce its level of RISPERDAL CONSTA inventory. This is also related to increased efficiencies and reliabilities in our manufacturing process for the last several quarters.

For the full year, we continue to expect total manufacturing revenue related to RISPERDAL CONSTA to range from $95 million to $100 million. For the third quarter of fiscal 2008, however, we expect lower manufacturing revenues related to RISPERDAL CONSTA in the range of $10 million to $13 million. It is very important to note this is an effort by J&J to more efficiently manage their internal inventory. And market sales of RISPERDAL CONSTA continue to grow and our full-year expectations for manufacturing revenues has not changed.

Second, in the fourth fiscal quarter of fiscal 2008, the March quarter, we began to share net losses incurred on VIVITROL with Cephalon. While we continue to streamline the VIVITROL cost structure, at this time we anticipate our share of net losses in our fiscal fourth quarter to range from $5 million to $10 million. To reiterate, this expectation is for the March quarter only. We expect our losses on VIVITROL beyond the March quarter to be reduced as sales continue to grow.

Just to remind you, we continue to anticipate GAAP net income of $10 million to $15 million for fiscal 2008 or basic EPS of approximately $0.10 to $0.15 per share based on a weighted average of 102 million shares outstanding. The net income expectation includes share-based compensation with an expense ranging from $20 million to $25 million.

In conclusion, our business is strong and we are excited about the opportunities ahead. Indeed with a very exciting once-weekly exenatide data, we have demonstrably lowered the risks to our business. During the remainder of the fiscal year, we will be focusing our efforts across several areas including supplying commercial product, working with VIVITROL to increase -- excuse me, working with Cephalon to increase VIVITROL sales, and advancing our product pipeline.

With that, I will turn the call over to David.

Thank you, Jim, and good afternoon, everyone. We are very pleased with the financial results from the quarter, but the most exciting news, as Jim mentioned this week are the results from the once weekly exenatide study. So I would like to start there.

As you know, we and our partners Amylin and Lilly, just announced positive results from the 30-week study of once-weekly exenatide. In our minds, the big questions have been answered with these clinical results. Our medical team and clinical consultants believe that these Phase III data are the best that have ever been seen in a diabetes trial for any agent.

Three out of four patients in the once-weekly exenatide arm were able to achieve hemoglobin A1C levels of less than 7%, which is the Hb A1C level recommended by the ADA. We believe this superior efficacy profile along with an improved tolerability compared to BYETTA bid may pave the way for a major change in diabetes treatment. Our role is now to work side-by-side with Amylin on the technology transfer and commercial scale up. We have never had any doubts about our ability to guide Amylin in scaling up and manufacturing this product.

We have significant experience in formulating, scaling up, and manufacturing long-acting products. We have already done it with our two commercial products, RISPERDAL CONSTA and VIVITROL. The work is underway in Hamilton, Ohio to bring on line the manufacturing process and facility scaled to meet the anticipated demand for this major new diabetes product.

Now let me turn to RISPERDAL CONSTA, which is a key financial driver for the Company. RISPERDAL CONSTA continues to perform well in the market and is on track to reach blockbuster status during the calendar year. As J&J acknowledged on a recent earnings call, a wealth of compelling clinical data is essential for building a successful pharmaceutical brand. At the European College of Neuropsychopharmacology or the ECNP meeting, which was in October, 17 posters were presented on RISPERDAL CONSTA. These data are important because they demonstrate what is happening in the real world and reinforce the caregivers the benefits of using RISPERDAL CONSTA.

More than five years post launch, the body of evidence continues to accumulate in support of RISPERDAL CONSTA's benefits. In addition, the fact remains that RISPERDAL CONSTA is the long-acting form of oral RISPERDAL, one of the world's most important atypical antipsychotics. In our view, the wealth of data and clinical experience means that RISPERDAL CONSTA will continue to be an important treatment option for schizophrenic patients and a highly competitive product for many years to come, even if other long-acting medicines are approved.

Turning to VIVITROL, we are pleased with the safety and efficacy profile for this important product. The patient success stories we consistently hear from the field tell us that VIVITROL is making a tremendous impact on many lives. We are making headway in developing the alcohol-dependence market and we are continuing to change behavior that has been ingrained in physicians and counselors for decades.

We are ending calendar year 2007 on firm footing, having learned a great deal about the market since launch. Earlier this year, we stated that we would lay out a financial and operational plan for calendar year 2008 in order to better match our expenses to product sales as we enter the profit and loss sharing phase of our collaboration with Cephalon, which let me remind you begins on January 1, 2008.

I am very pleased to report that we have done this with a good strategy designed to target the commercial opportunities with the greatest potential for product adoption and sales growth.

One operational change to note is that we have realigned the commercial organization to be 70 people strong in the field, with good representation from both companies. This is a talented group of top performers who have already shown the most promise for growing the VIVITROL brand. This group is also supported by a dedicated team of marketing, medical affairs, and customer segment specialists.

From a sales perspective, we are continuing to establish a foundation for future sales growth. Gross sales of VIVITROL by Cephalon were $4.7 million for our second fiscal quarter. We will have the first national sales meeting for our newly configured team next week and we will enter calendar year 2008 with a lot of excitement, enthusiasm, and momentum for the product.

From a clinical perspective, we also recognize the importance of generating additional data to support and enhance the safety and efficacy profile of VIVITROL. We plan to expand the label for VIVITROL beyond alcohol-dependence. Based on the mechanism of action for VIVITROL and strong physician interest, we feel it is a logical next step to pursue an opiate-dependent indication for VIVITROL. We have submitted a protocol to the FDA and plan to begin clinical work in the first half of calendar year 2008.

I would now like to comment briefly on the rest of our pipeline. With respect to AIR insulin, we and our partner Eli Lilly continue to be very optimistic about the commercial opportunity for this product. Of the millions of Americans who take medication to manage their blood sugar, over 30% take insulin. This leads us to believe that our inhaled insulin can provide an important treatment option for patients.

To be successful in this market you need three things, a better product, better data, and a better partner. We believe that our AIR insulin program will be better with respect to all three of these requirements. We are developing a product that is designed to address the needs of patients and healthcare providers. Our sophisticated technology enables the design of a simple patient-friendly system. Together with Lilly, we have in place a comprehensive clinical development program designed to assess safety, efficacy, and outcomes in diabetic patients compared to other treatment options.

And Lilly has demonstrated experience and leadership in the field of diabetes care for the past 80 years. This is an important product opportunity and we look forward to updating you on our progress in the months ahead.

As you know, we are committed to building a multiproduct company and are focused on the best opportunities to generate long-term value. So let me conclude with a few updates on our early stage programs. We and Lilly recently completed the Phase I study of AIR PTH. The data from the study indicates that additional feasibility and formulation work are required. At this time, due to other priorities, we and Lilly are not planning to pursue further development of AIR PTH.

We continue to be excited by our other two early stage programs, ALKS 29 an oral treatment for alcohol-dependence, and ALKS 27, for the treatment of chronic obstructive pulmonary disease or COPD. For ALKS 29, we are finalizing our plans for the next Phase II study, which is expected to begin in calendar year 2008.

For ALKS 27, we and our partner Indevus recently announced positive results from a Phase IIa clinical study in patients with COPD. Our plan is to continue clinical development while we identify a commercial partner for the program.

In conclusion, we are continuing to advance our business and our pipeline. In the coming months we are focused on the following milestones. Number one, initiation of a clinical study of VIVITROL for the treatment of opiate dependence; number two, initiation of a Phase II study for ALKS 29; and number three, providing you with updates on additional clinical studies for once-weekly exenatide.

To conclude, we are pleased with our progress we're making in our business and look forward to updating you on our progress in the coming months. With that, I will now turn the call back to Rebecca.

Thanks David. We will now open it up for Q&A. Operator?

(OPERATOR INSTRUCTIONS) Dave Windley, Jeffries & Co.

In the last comments you made about ALKS 27 and 29, in particular on 27, and continuing clinical work on that compound as you are pursuing a partner, can you elaborate on that just a little bit? How much are you undertaking and how far would you continue to advance the compound before partnering if a deal is not commenced, say, in the near term?

Dave, this is David. It is a great question. What we're doing is obviously we are in collaboration with Indevus. And what we're trying to do is outline the specific very next steps of the program to get us on the path of doing this -- this first study we did was a single dose Phase II study and we know we have to do multiple dose studies as the next Phase II part of the program. So what we're doing is we are working on -- putting ourselves in a position to do those things in parallel to finding a partner to do this program.

So we have got work over the next several months that we can do in parallel. We're not going to make a significant commitment at this point prior to finding a potential partner, but there is enough work we can do to put us in a position to pull the trigger when we want to.

Okay, so suffice it to say you would move forward on the multiple-dose study but you would not go beyond that without a partner in place. Is that a fair assessment?

You know, again, we take this step-by-step and the next step would be a multi-dose Phase II study. You've got to see what the results of that look like before you decide what the next step of it is. So we've got lots of time I think to figure that out and when we do, we will obviously provide you with more specific information. Remember this is a big opportunity. We are in -- we're trying to go after a SPIRIVA-like once-a-day product. And as you know, SPIRIVA is a $1 billion product with Pfizer and Boehringer Ingelheim.

Sure. Jim, on VIVITROL, the recognized manufacturing sales and cost of sales in the quarter, can you give me a sense of where that puts -- I am trying to remember exactly how inventory and distributing the product works. Is there -- how much does Cephalon hold is essentially what I'm trying to get to?

In terms -- you mean how much inventory do they hold?

Yes.

I think we're in a good position with regard to inventory. Cumulative sales for the last year has been close to $15 million. We continue to see the product grow and at this point we do not have any finished product inventory on our books. So I think we're in a good position there now.

Okay, and then last question I have and I will jump out is, Rich was quoted in an interview recently as talking about in the AIR insulin and pulmonary insulin product talking about AIR insulin and most of the pulmonary insulins having the same basic effect on lung function. What's Alkermes' view in regard to the pulmonary insulin market and how that lung function risk perception will affect commercialization?

This is the one question for Rich. Rich joins us on these calls, and so we will let Rich take this one since he was directly involved.

Here is his quota.

It wasn't exactly a fair interview, I don't think. Actually what the reporter was trying to get me to do was to go on record saying that we would not require -- our product would not require a pulmonary function test. My response was I am not going to say that because until we have the data in hand, we would just assume that all these things are looking the same absent data. So that isn't the way it got reported.

I actually believe that the pulmonary function issue to the marketplace were not the critical issue for EXUBERA. I think the critical issues for EXUBERA related more to the embodiment of the device itself, and the data set that they had to persuade payers and doctors and patients that made sense to switch.

Okay, great. Thank you.

Jami Rubin, Morgan Stanley.

Just a couple of questions related to VIVITROL. You talk about how the organization, Alkermes and Cephalon, is working towards achieving profitability and matching investments with revenues, etc., etc. Can you elaborate a little further on how you intend to achieve this? I thought you had started out with 70 sales reps, but I might be wrong. So if you could talk about how the -- what your plans are and where you are cutting back in order to achieve profitability and where revenues have to be in order to reach profitability.

This is David. I'll take the first part of that question then maybe Jim can frame sort of the calendar year 2008 and financial expectations going forward.

And then can I just ask one more question before you get going?

Sure.

So this quarter encompassed the summer months. Was there anything unusual we should be aware of during the summer? Could you share with us the monthly data as you have before?

Let me come back to that. But let me just start with where we were as we came into the summer was we had about 120 sales reps with Cephalon and about 30 Alkermes what we called MMDs, managers of market development. So we had a total of about 150 people in the field. We obviously also had medical affairs staffs at Cephalon, at Alkermes. We had additional marketing support, other kinds of infrastructure from both organizations supporting the brand.

What happened over the course of the summer is Bob Roche and I together with leadership team said what do we need to do? What's working? What is not working? How do we put together what we need going forward to begin to match better, as we have talked about, investments in the brand and what we think the revenue opportunities are?

So we worked through that in the August/September time frame and we started to roll that out during the month of October. Where we sit right now is we have got approximately 70 people in the field, a combination of Cephalon and Alkermes people working side-by-side in areas, in territories trying to create the pull through with doctors to use the product. This group is supported by a dedicated group of medical affairs, marketing, and what we call customer segment people now and these customer segment people are folks that are really looking at where we think the major opportunities to grow the product are.

Some of these include the Veterans Administration/DoD area, major treatment centers, things like that. So that is where we are right now and we believe that we have a very good plan. It is scaled appropriately. Just to remind you, this is very much a system sell. You need to set up doctors in their offices, be able to handle this product and really change behavior, which is what we're trying to effect.

So we have worked through that and we have come out of it. We still were able to achieve $4.7 million of sales in the fiscal quarter and we have not skipped a beat in terms of going forward. So I hope that answers it.

Was there any summer affect at all or --?

No, no, not really, none at all. You can imagine that something like this can be very disruptive to a field organization. The reality is as best we can tell it did not affect revenues through the period.

Okay, thank you.

Elliot Wilbur, CIBC World Markets.

I guess with respect to your commentary about managing the VIVITROL partnership to reach breakeven by the end of 2008, it would seem that in terms of expense reduction that there is a lot more flexibility on the Cephalon side going forward than on the Alkermes side. I am just wondering if that is a fair commentary, Jim?

Yes, I think that is fair. They have the majority of sales and marketing spend. I think as David mentioned, we're going to have fewer people that are Alkermes employees in the field. As we went from roughly 150 or 140 down to 70, we moved around and have let go some Alkermes people as well. But the majority of that cost savings will come on the Cephalon spending side.

Okay and then just I noticed that there was also some form of labeling change that was posted on the FDA's website on the 26th. Anything that -- anything noteworthy there?

No, no, not at all.

Okay, then moving on to RISPERDAL CONSTA and now that J&J I guess has filed long-acting paliperidone, I guess assuming that it does receive approval and is commercialized, is there anything in the relationship that sort of guarantees some sort of level of support behind CONSTA or is that just basically kind of a best efforts deal?

You know, what J&J has to balance is a blockbuster product in RISPERDAL CONSTA and over $1 billion of sales with the introduction now of a potential longer acting product in the marketplace. And I think given the start that INVEGA has in the marketplace, there is a question what the ultimate commercial viability of palmitate is going to be. So the people at J&J are not dummies. And they manage multiple brands in many markets.

So we remain confident that they are not going to kill the golden goose here, so to speak, with regard to RISPERDAL CONSTA and figure out the best way to balance a franchise in a big market with schizophrenic patients.

I think it's also important to note that CONSTA has been on the market for five years. David mentioned some of the data that is beginning to come out now. We're going to have a perpetual lead on any other product that comes in the long-acting space with the pharmacoeconomic data, the payer data, the payer experience. It is going to be very important.

Also it is worth noting that we get almost two-thirds to 70% of our revenues from CONSTA outside of the United States, and this is an area where J&J isn't even close to the filing paliperidone palmitate. We and J&J I think continue to view CONSTA as a very, very important product in both of our portfolios.

Okay, thanks. And then with respect to ALKS 29, you mentioned initiating another Phase II study here in the near term. At what point are you guys going to lift the hood a little bit on that so we have a better idea of exactly what actives are in that product?

Probably I think we will be in a better position next year to do that. You know, we are not disclosing things purposely for competitive reasons so that we can get our strategy figured out, so to speak, from a proprietary nature standpoint and not give away any secrets here.

But I think the important thing is the fact that we have leveraged the learnings of VIVITROL into the development of this product. We continue to see this as a big opportunity. If we're going to be in this with VIVITROL to help change behavior and build a market, it makes sense to have a second and a third and multiple products in this market space. That is also why we're developing VIVITROL now for opiate, for example. So we see this as major opportunities to develop proprietary products.

Okay, and one final question. Speaking of leveraging the experiences of VIVITROL, any update on your thinking around the plans for ex-U.S. commercialization?

We're still in the process of working through the MAA with the UK and German authorities and expect to hear back from them soon. And again, as soon as we hear things we will let you know.

All right, thank you.

Hari Sambasivam, Merrill Lynch.

A couple of quick questions. One is on AIR insulin. Just in terms of the efficacy of this particular product versus Humalog, how exactly -- what is the rationale that we're going to see in differentiated efficacy of this product versus either Humalog or other insulin? And as far as I know, the PK profile is almost identical, so I'm just wondering could you maybe address that in terms of how you are expecting different A1C or different blood sugar control?

The second question relates to the oral alcohol-dependence product, I think is the ALKS 29, if I'm not mistaken. In terms of that development, I'm just wondering what exactly do you need to see at the interim steps in terms of -- is it a certain amount of abstinence or is it a certain amount of reduction in heavy drinking days? What is the sort of efficacy that you need to sort of make that go/no go decision vis-a-vis VIVITROL? I mean you've got VIVITROL and I'm just wondering what else do you need to see before you go ahead with that investment?

This is David. A couple of great questions. On the AIR insulin and trying to differentiate it vis-a-vis Humalog specifically, right now I do not see that as really the differentiating aspect of AIR insulin. I would refer you to some of the things that have been posted on the clinicaltrials.gov website around the overall clinical development program for AIR insulin. And if you go in there, there are two specific studies that I would point you to.

One is a glargine comparison study, so actually what we're trying -- what we hope to show is benefit of pulmonary insulin compared to glargine in the control of Hb A1C. So that is a differentiating fact.

And then the second study that I would point you to is a study that is listed there. I think it's listed as a concordance study and in a concordance study, what we're trying to do is we're trying to basically create two groups of patients, one who don't have access to AIR insulin and another that does have access to insulin and see in a real world kind of setting between those two patients groups what works better with the -- whether you get better glucose control and if so how with this AIR insulin product and system.

So that is where we hope to show some differentiation in the marketplace and as Rich said in his comments about safety, efficacy, simplicity of device, and some of the comments I made in the prepared remarks, what we really need is we need to see better data and we have that. Pfizer did not. And a better device and I think it is intuitive that our device is better and simpler than what the EXUBERA device was. And we have a better partner I think in Lilly.

So we feel very good about -- we have to wait and see what the data looks like. We will get that data middle of next year, but that is where we really hope to differentiate ourselves.

With regard to ALKS 29 and differentiation of that vis-a-vis VIVITROL, I see it really as two very different things. There's two issues in this marketplace that I think you have to recognize with regard to VIVITROL. One is just the acceptance of medication in the marketplace, and are physicians going to start to use medicine more and more in the treatment of alcohol dependent patients?

That is just a general phenomenon that anybody who comes into this market with either an injectable or an oral they have to address, so you have to be able to show efficacy. You have to be able to show a better side effect profiles. Remember there's only a couple products in this marketplace, and so that is when we think about designing an oral alcohol product, that is really where we want to differentiate ourselves is to the other oral competition that's there.

The other challenge with VIVITROL is the fact that it is an injectable and there's logistics associated with that. There is an administration, and that is just a higher level of work that has to be done in order to support a product like VIVITROL. So again, we continue to see this big opportunity, lots of patients, room for multiple products in this space, and if we're going to make this investment in terms of building the market, we feel we need to be there with an oral product.

I think, Hari, it's worth noting, too, RISPERDAL CONSTA at close to $1 billion in a $4 billion plus overall RISPERDAL franchise and an almost $10 billion atypical antipsychotic franchise, you know, if we can start moving the medical community to understand the benefits of pharmacotherapy in the treatment of alcoholism, there's going to be a big opportunity for an oral product. The ones out there right now have a lot of drawbacks.

So I think as David said, we're looking very closely at the drawbacks that the current oral therapies have and if we can improve upon those, we think there is a big opportunity there.

And specifically what end points would you be looking at in your Phase II studies before you make that decision? Is it simply a comparable type of reduction in heavy drinking days and/or abstinence, David or Jim?

Yes, and that is what we kind of studied in the first set of studies that we have done here, looking at relapse rates, abstinence levels, amounts of drinking, heavy drinking in particular. So those will continue to be primary end points for this, but that is not the exclusive set. There are other things we're going to look at.

Having been through the regulatory process and getting a product approved for alcohol dependence, we do have some competitive advantage in that arena as well.

That's great, thank you.

Jim Reddoch, FBR.

Thanks for taking the question. It is actually Sumesh for Jim. I have a couple quick questions. First of all on LAR, in your opinion which is a better precedent for LAR manufacturing from a regulatory standpoint? Is it CONSTA or VIVITROL? What is the quick answer for why VIVITROL got through the FDA with 100 plus patients trial and CONSTA took much longer and had a much larger patients trial to enroll?

This is David. It is hard to say exactly which is more comparable. We learned a lot through both, I guess. In the case of RISPERDAL CONSTA, we were already at the manufacturing scale when we did the clinical study, so there was not a lot of additional "comparability" work that we needed to do.

With regard to VIVITROL, we had done most of our pivotal clinical studies at 1 kilogram scale and we had to show comparability to the 20 kilogram scale. So from that standpoint, we had additional work that we had to do with the FDA that we basically had to negotiate the FDA -- negotiate what the parameters were for that comparison with the FDA, demonstrate that, and then make the change to the 20 kilogram scale.

So that is really the path we are more on with the once-weekly exenatide. I think as we have talked, you know we have been at already two different scales and supply of material to the clinical program. We have been at essentially a 100 gram scale and 1 kilogram scale. Now we're in the process of scaling up to much larger 15 to 20 kilogram scales. So we've got to demonstrate comparability just like we did with VIVITROL. It is a slightly different program. We're negotiating with the FDA and we're working through that.

So thinking about it and talking about it here, we're probably more like VIVITROL with the once-weekly exenatide.

Okay and how about with regards to the patient numbers for the trial and getting through the FDA? I mean VIVITROL has a much smaller trial than CONSTA. What is the quick answer for why that happened?

I think part of it was Alkermes versus J&J doing the program, and what our regulatory philosophy and approach was. So we got VIVITROL approved under a 505(b)2 application, leveraging all of the safety database with the oral naltrexone compound and in the context of the discussions with the FDA, they basically just said you needed to do one clinical study to support efficacy as well as some additional work to show long-term safety of the product. So that (multiple speakers)

Was RISPERDAL not through a 505(b)2, then?

I don't believe that it was. I think there were at least two studies that were required.

There was two studies.

Two studies and additional safety work, but again, (multiple speakers)

Part of it there was just J&J's conservatism but also the fact that they ran one study ex-U.S. and had different question. They did a noninferiority study ex-U.S. and they did a comparison of CONSTA versus placebo in the U.S. And I think that the study that Amylin and Lilly designed most recently with long-acting exenatide LAR was a very robust study in its comparison to the active and the noninferiority design. So --.

And actually one more quick question. What manufacturing updates would we get over the next twelve months for LAR?

Again, I would leave it to Amylin to really provide the details on that. We are very busy working side-by-side with them and I would leave it to Amylin to really comment on specifics.

Okay. Thanks a lot.

Donald Ellis, Thomas Weisel.

I just had a quick question for Jim and it is regarding operating expenses. For the first half of the year they were about $91 million. Would you expect the second half of the year to be equal to that, above that, or below that? I'm including SG&A and R&D to [the other].

Yes, I think that is a pretty good assumption regarding each specific category. We have guided to each and I think you could take that as a pretty good proxy going forward. I think SG&A expense will come down a little bit given the VIVITROL changes in the fourth quarter, but other than that I think we're tracking in line.

Pretty much the same, great. Thanks a lot.

Operator, I think we have time for one more question.

Scott Henry, Oppenheimer.

I did have a couple of questions. Starting on VIVITROL, could you tell me the $4.7 million sales in the quarter, what was the average reps during that quarter? I guess what I am trying to figure out is if you had roughly 150 people in the field and it is going to 70, how many did you have in the field this past quarter? I'm just trying to gauge if any of the kind of base business is at risk from reducing the sales force out there.

And additionally I don't know if you mentioned, but would you estimate a break even run rate for VIVITROL under the new set up?

I will Jim answer the second one. Let me take the first one just in terms of average sort of sales amounts per rep. We really -- there was a distribution of sales across sales reps, and quite frankly there were some sales reps who unfortunately had not sold very much at all.

What I want to say and it builds off of I think some of the comments I made to Jami on her questions, this is not a traditional pharmaceutical sell process. It is not about reach. It is not about frequency. It really is about targeting -- targeting high potential physicians and then living with them for as long as it takes to get them converted to adoption of medicine and in particular utilization of VIVITROL.

So we feel with the 70 person field organization and some of these market segment specialists that we are really at a good point in terms of working very well together, team oriented selling, systems selling, getting all of the support you need be that managed care support, be that medical affairs support, be that support in the field to really make the conversion happen. So it is really hard to say -- if you look at an average revenue per rep and make any conclusions from it. I hope that helps.

I guess what I was really trying to figure out is when exactly you did streamline the sales force? I'm trying to figure out if it was streamlined before the quarter, during the quarter, or at the end of the quarter?

It was streamlined probably two-thirds of the way through the quarter.

September/October timeframe, Scott.

Okay, that's helpful.

But that being said, I think David pointed out earlier that those sales reps who were really doing the stellar job are those reps who are continuing to work in the field. So I don't think you should expect any sort of degradation based on the realignment of the sales force.

Certainly fair enough. Would you care to estimate a break even in terms of revenues on VIVITROL?

I think, Scott, we will give our estimate going forward when we typically do on the May call when we give our estimates for the next fiscal year. I would only say this, though. We have put in place a much lower expense run rate and I think we're targeting break even by the end of the year and those expenses are around $[15] million a quarter.

So as you move out there, but I think it's important to note that certainly from our perspective, if sales are not quite where we think we are through the year, this is an investment sharing with Cephalon that certainly both companies can handle, and I think we view VIVITROL as a long-term investment and will -- obviously we hope to see break even by the end of the year but if we are a quarter off, a quarter or two off, I do not think you'll see us going back and hacking at the sales force again.

Fair enough, and I guess just a strategic question. Certainly it looked like very positive exenatide LAR data which validates your technology. Do you think that could potentially increase business development going forward?

Absolutely. It is a great question and this is now hopefully our third approved product. The data were outstanding. I think there is something to this technology with regard to certain diseases being amenable to continuous delivery of therapy over a course of time. So we certainly expect that this will lead to development of other product both from a proprietary standpoint as well as from a partnered standpoint.

Thank you for taking the questions.

Thank you everyone for dialing in. And as always, if there are any additional questions, don't hesitate to call myself or Jim Brady. Have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.